Computing Moral Hazard Problems Using the Dantzig-Wolfe Decomposition Algorithm

29 Pages Posted: 21 Nov 2012

See all articles by Edward S. Prescott

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 1998

Abstract

Linear programming is an important method for computing solutions to private information problems. The method is applicable for arbitrary specifications of the references and technology. Unfortunately, as the cardinality of underlying sets increases the programs quickly become too large to compute. This paper demonstrates that moral-hazard problems have a structure that allows them to be computed using the Dantzig-Wolfe decomposition algorithm. This algorithm breaks the linear program into subproblems, greatly increasing the size of problems that may be practically computed. Connections to dynamic programming are discussed. Two examples are computed. Role of lotteries is discussed.

Suggested Citation

Prescott, Edward (Ned) Simpson, Computing Moral Hazard Problems Using the Dantzig-Wolfe Decomposition Algorithm (June 1, 1998). FRB Richmond Working Paper No. 98-6. Available at SSRN: https://ssrn.com/abstract=2123684 or http://dx.doi.org/10.2139/ssrn.2123684

Edward (Ned) Simpson Prescott (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

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